Server Maker’s Rocky Road Ahead
Super Micro Computer (NASDAQ: SMCI) has been on a wild ride, with its stock skyrocketing 1,480% in the last two years, only to plummet over 70% from its record high in just eight months. As a major partner of Nvidia, the server maker should benefit from the growing demand for artificial intelligence (AI) infrastructure. However, the company has been accused of accounting manipulation, casting a shadow over its future.
A Leader in AI Servers
Super Micro Computer’s internal manufacturing capabilities and “building block” approach to product development enable it to bring new technologies to market faster than its competitors. This advantage has helped the company secure a leadership position in AI servers, a market expected to grow at 30% annually through 2033. Additionally, Supermicro is the top supplier of direct liquid cooling (DLC) systems, which could strengthen its position in AI servers.
DLC Systems: A Game-Changer
DLC systems reduce data center power consumption by 40% and occupy 80% less space than traditional air-cooled systems. As AI servers generate more heat than general-purpose servers, demand for DLC systems is expected to rise quickly. Supermicro estimates that 15% (and possibly up to 30%) of new data center installations will use liquid cooling in the next two years, positioning the company to capture a significant share of this growth.
A Troubled Past
However, Supermicro’s recent troubles have led to a decline in investor confidence. In August 2024, short-seller Hindenburg Research accused the company of accounting violations, including improper revenue recognition and sanctions evasion. The company delayed filing its Form 10-K for fiscal 2024, and CEO Charles Liang disputed the allegations. Since then, the Justice Department has launched a probe, and Supermicro’s auditor, Ernst & Young, resigned, citing concerns over management’s representations.
A Complicated Situation
The situation is further complicated by Supermicro’s past accounting violations, which led to a $17.5 million fine from the Securities and Exchange Commission (SEC) and a 18-month delisting from the Nasdaq Exchange. Given this history, investors should approach with caution.
Wall Street’s Verdict
Twelve analysts covering Supermicro have set a median price target of $30.50 per share, implying an 8% downside from its current share price. Six analysts believe the stock will fall more than 8% in the next year. Furthermore, seven out of 19 Wall Street analysts have discontinued coverage in the last three months, indicating a clear lack of confidence in the company’s prospects.
A Warning to Investors
Prospective investors should exercise caution when considering Super Micro Computer stock. With too many unknowns and a troubled past, it’s difficult to make an educated decision. Until the company addresses its accounting issues and restores investor confidence, it may be wise to avoid this stock.
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